Transactions surge in Dubai realty not a bubble more a symptom of the regional crisis

The one third surge in the value of real estate transactions in Dubai to $29.4 billion in the first half of 2013 has brought worries about a new property bubble in the emirate.

In the first half 30,469 properties changed hands against 18,953 for the same six months last year. House prices are up 20-25 per cent in 12 months.

Worry or celebrate?

The Dubai Land Department is a reliable source of data. These are true figures. So are they a cause for concern or a reason to be positive about the outlook?

Probably both. Annualized house price gains at this sort of level are usually unsustainable in any real estate market. However, the important thing to note in Dubai is that we have still not regained the peak prices of the 2008 boom, although that cannot be far off.

There is also the possibility of a downturn in the sector this autumn if the world goes through another major financial crisis. This may look unlikely with Wall Street riding high. But then that is how it looked in the summer of 2008 with the high oil price seemingly unstoppable. By the autumn things looked very different.

But this is not autumn 2008 again for Dubai realty. The market recovery is 75-80 per cent cash financed. This is not a debt bubble as it was in 2008. That means a global crisis will produce less forced sellers and house prices will not fall by 60 per cent again.

Indeed, those who have not bought into the real estate recovery will likely see any price weakness as an opportunity to enter the market. We are not necessarily talking about European speculators here but business men with cash fleeing troubled nations in the region of which there are more than we care to list at the moment.

Safe haven status

For the transactions surge in Dubai real estate of the past year or so has been more a symptom of the region’s problems and Dubai and the UAE as a safe haven than a matter of speculation in real estate. There’s also been a recognition that Dubai real estate was particularly good value for a global hub city and some opportunistic buying.

This probably sets the stage for an advance in house prices to much higher levels in Dubai as the leading commercial city of the Middle East and a rare safe haven for regional investment. It’s a healthy combination of investment inflows and strong actual demand for accommodation fueled by Arab Spring exiles and the growing local economy.

Any property cycle can have brief setbacks but this looks a strong up cycle that is far from finished, and not even half-way through a three to five year upturn in prices.